SUPREME COURT OF ARIZONA
En Banc
RICHARD GRAND and MARCIA GRAND, ) Arizona Supreme Court
co-trustees of the R.M. Grand ) No. CV-09-0317-PR
Revocable Living Trust, dated )
January 25, 1991, ) Court of Appeals
) Division Two
Plaintiffs/Appellants/Cross- ) No. 2 CA-CV 09-0014
Appellees, )
) Pima County
v. ) Superior Court
) No. C20025348
JOSEPH P. NACCHIO, a New Jersey )
resident; JOHN A. McMASTER, a )
New Jersey resident; QWEST )
COMMUNICATIONS INTERNATIONAL, ) O P I N I O N
INC., a Delaware corporation; )
and QWEST B.V. a foreign )
organization, )
)
Defendants/Appellees/Cross- )
Appellants. )
)
__________________________________)
Appeal from the Superior Court in Pima County
The Honorable Carmine Cornelio, Judge
AFFIRMED
________________________________________________________________
Opinion of the Court of Appeals, Division Two
222 Ariz. 498, 217 P.3d 1203 (App. 2009)
AFFIRMED
________________________________________________________________
TIFFANY & BOSCO, P.A. Phoenix
By Richard G. Himelrick
And
MUNGER CHADWICK PLC Tucson
By Michael J. Meehan
Attorneys for Richard Grand and Marcia Grand
1
PERKINS COIE BROWN & BAIN P.A. Phoenix
By Joseph E. Mais
Brian C. Lake
Attorneys for John P. Nacchio
LEWIS AND ROCA LLP Tucson
By John N. Iurino
Sivan R. Korn
Attorneys for John A. McMaster
FENNEMORE CRAIG, P.C. Phoenix
By James D. Burgess
Timothy Berg
And
BOIES, SCHILLER & FLEXNER LLP Washington, DC
By Jonathan Sherman
Attorneys for Qwest Communications International, Inc.
and Qwest B.V.
PAUL G. ULRICH, P.C. Phoenix
By Paul G. Ulrich
Attorney for Amicus Curiae ML Liquidating Trust
________________________________________________________________
H U R W I T Z, Vice Chief Justice
¶1 The issue for decision is whether the defendants
“participated in” an allegedly unlawful sale of securities. The
courts below held that the defendants did not participate in the
sale. We agree.
I.
¶2 In 1999, Koninklijke KPN N.V. and Qwest Communications
International, Inc. (“Qwest”) formed a joint venture, KPNQwest
(“KPNQ”). Joseph P. Nacchio was Qwest’s CEO and chairman of
KPNQ’s supervisory board. John A. McMaster, Qwest’s former
executive vice president, was KPNQ’s CEO.
2
¶3 The R.M. Grand Revocable Living Trust (“the Trust”)
purchased 30,000 shares of stock from KPNQ in the initial public
offering (“IPO”). During the following six months, the Trust
purchased an additional 255,000 shares of KPNQ from other
sellers in the so-called aftermarket.
¶4 After KPNQ failed, the Trust commenced this action
against Qwest, Nacchio, and McMaster. As first amended, the
complaint alleged common law claims and violations of state and
federal securities laws.
¶5 After the superior court dismissed the majority of the
first amended complaint, the Trust filed a second amended
complaint, alleging violations of Arizona and federal securities
laws. The second amended complaint also asserted common law and
statutory consumer fraud claims. The Trust sought rescission of
the KPNQ stock purchases, and both compensatory and punitive
damages.
¶6 The superior court granted partial summary judgment to
the defendants, holding that the Trust could not seek either
rescission or damages with respect to shares it sold before
receiving notice of defendants’ allegedly illegal conduct. The
Trust then dismissed all claims relating to KPNQ stock it sold
after the alleged fraud was discovered. The court of appeals
reversed, affirming the superior court’s ruling on damages, but
3
reversing with respect to rescission. Grand v. Nacchio (Grand
I), 214 Ariz. 9, 13 ¶ 2, 147 P.3d 763, 767 (App. 2006).
¶7 After remand, the Trust filed a third amended
complaint, which alleged only state securities law claims and
sought only rescissory damages. The gravamen of the third
amended complaint was that the defendants had fraudulently
overstated Qwest’s earnings, and that the Trust would not have
purchased the KPNQ shares had the fraud been disclosed. In
response to the defendants’ motions to dismiss, the Trust
acknowledged that the third amended complaint had abandoned any
claims that the defendants had “induced” the aftermarket KPNQ
stock purchases. Instead, the Trust relied entirely on the
theory that the defendants were liable under A.R.S. § 44-2003(A)
(2003) because they had “participated in” the stock sales.
¶8 The superior court granted the motions to dismiss with
respect to all aftermarket purchases. After moving
unsuccessfully for reconsideration, the Trust dismissed with
prejudice its claims concerning shares purchased in the IPO.
¶9 The court of appeals affirmed the trial court’s
dismissal of the aftermarket claims, finding that no defendant
had “participated in” aftermarket sales of KPNQ stock. Grand v.
Nacchio (Grand II), 222 Ariz. 498, 501 ¶ 10, 217 P.3d 1203, 1206
(2009). The court declined to decide whether the third amended
complaint stated a claim for relief under § 44-2003(A) for
4
inducing the aftermarket sales because the Trust had expressly
forsworn such a theory both in the superior court and on appeal.
Id. at 502 ¶¶ 12-13 & n.5, 217 P.3d at 1207 & n.5.
¶10 We granted the Trust’s petition for review because
interpretation of the Arizona Securities Act (“ASA”), A.R.S.
§§ 44-1801 to 44-2126, is an issue of statewide importance. We
have jurisdiction pursuant to Article 6, Section 5(3) of the
Arizona Constitution and A.R.S. § 12-120.24 (2003).
II.
A.
¶11 This case involves the intersection of three
provisions of the ASA: A.R.S. §§ 44-1991(A) (2003), 44-2001(A)
(2003), and 44-2003(A). The first, § 44-1991(A), provides in
relevant part that
[i]t is a fraudulent practice and unlawful for a
person, in connection with a transaction or
transactions within or from this state involving an
offer to sell or buy securities, or a sale or purchase
of securities . . . [to] directly or indirectly
. . . [e]ngage in any transaction, practice or course
of business which operates or would operate as a
fraud.
Section 44-1991(A) is “almost identical to the antifraud
provisions of the 1933 Securities Act, 15 U.S.C. § 77q.” State
v. Superior Court (Davis), 123 Ariz. 324, 331, 599 P.2d 777, 784
(1979), overruled on other grounds by State v. Gunnison, 127
Ariz. 110, 618 P.2d 604 (1980).
5
¶12 Section 17(a) of the 1933 Securities Act, however,
contains no express private cause of action. See Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. 723, 734 n.6 (1975)
(pretermitting whether a private cause of action for violations
of § 17(a) of the 1933 Act can be implied). In contrast, the
ASA explicitly provides for a private cause of action for
violations of § 44-1991 in § 44-2001(A), which states that a
sale of securities in violation of article 13 of title 44 is
“voidable at the election of the purchaser,” who may “recover
the consideration paid for the securities.” “[W]hen rescission,
though appropriate, is impossible or infeasible (as when the
buyer has sold the property to a third party) courts may
substitute rescissory damages,” which are the financial
equivalent of rescission. Standard Chartered PLC v. Price
Waterhouse, 190 Ariz. 6, 34, 945 P.2d 317, 345 (1997); accord
Davis, 123 Ariz. at 331, 599 P.2d at 784; Trump v. Badet, 84
Ariz. 319, 322, 327 P.2d 1001, 1004 (1958).
¶13 The private right of action recognized in § 44-2001(A)
may be pursued against “any person, including any dealer,
salesman or agent, who made, participated in or induced the
unlawful sale or purchase.” A.R.S. § 44-2003(A). Section 44-
2003(A) thus applies the § 44-2001 rescissory remedy to those
other than the seller of the securities. The statute has but
one exception, added in 1996, which provides that “[no] person
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shall be deemed to have participated in any sale or purchase
solely by reason of having acted in the ordinary course of that
person’s professional capacity in connection with that sale or
purchase.” 1996 Ariz. Sess. Laws, ch. 197, § 6 (2nd Reg. Sess.)
(amending A.R.S. § 44-2003(A)).
B.
1.
¶14 In reviewing a dismissal for failure to state a claim
under Arizona Rule of Civil Procedure 12(b)(6), we “assume the
truth of the well-pled factual allegations and indulge in all
reasonable inferences therefrom.” Cullen v. Auto-Owners Ins.
Co., 218 Ariz. 417, 419 ¶ 7, 189 P.3d 344, 346 (2008).
¶15 The relevant allegations of the third amended
complaint were described at length below, Grand II, 222 Ariz. at
501-02 ¶¶ 9-12, 217 P.3d at 1206-07, and can be readily
summarized. That complaint alleges that Nacchio visited Arizona
in 1999 and urged Richard Grand, co-trustee of the Trust, to
purchase aftermarket shares without disclosing the Qwest
accounting fraud. The pleading alleges similar conduct in 1999
in California by McMaster. It also alleges that KPNQ and Qwest
sent various communications to Grand and the investing public,
falsely describing the financial health of the joint venture.
7
2.
¶16 The legislature intended the ASA “as a remedial
measure” for the “protection of the public” and therefore
specified that the act be “liberally construed.” 1951 Ariz.
Sess. Laws, ch. 18, § 20 (1st Reg. Sess.). The language of the
Act confirms a broad intent to sanction wrongdoing in connection
with the purchase or sale of securities.
¶17 Section 44-1991(A)(3), for example, makes it illegal
for any person “directly or indirectly” to “[e]ngage in any
transaction, practice or course of business which operates or
would operate as a fraud or deceit.” Section 44-2001(A), in
turn, provides a sweeping rescissory remedy for violations of
§ 44-1991. Section 44-2003(A) speaks in similarly broad terms,
authorizing an action, with but one narrow exception, against
“any person . . . who made, participated in or induced the
unlawful sale or purchase.”
¶18 This is sweeping language of inclusion. Thus, courts
are not ordinarily required to parse whether a person violating
§ 44-1991(A)(3) should be separately characterized under § 44-
2003(A) as having “made,” “participated in,” or “induced” the
unlawful purchase or sale. Nor need complaints asserting claims
under § 44-2003(A) ordinarily engage in such an analysis. The
Trust argues that anyone who violates § 44-1991(A)(3) is
necessarily a person who “made, participated in or induced the
8
unlawful sale or purchase,” and thus within the scope of § 44-
2003(A). We assume, without today deciding, that such is the
case.
¶19 The defendants do not contest that the third amended
complaint alleges conduct violating § 44-1991(A). Nor do they
contest that the third amended complaint stated a claim for
relief under § 44-2003(A) for inducement. We agree. See Davis,
123 Ariz. at 331, 599 P.2d at 784 (holding Corporation
Commission liable for rescission damages for misleading
statements regarding regulation of insolvent corporation, which
“induced” investors to purchase securities); cf. Standard
Chartered, 190 Ariz. at 21-22, 945 P.2d at 332-33 (describing
inducement as overcoming “indifference, hesitation, or
opposition” by explaining the “persuasive advantages or gains”
of stock ownership) (internal quotation marks omitted).
¶20 This, however, is an unusual case. Represented by
able counsel, the Trust made a conscious decision, years after
filing the initial complaint and after the case had once been on
appeal and remanded, to forswear a § 44-2003(A) inducement
theory. Instead, in its opposition to the motions to dismiss
the third amended complaint, the Trust relied entirely on the
contention that the defendants had “participated in” the sale of
the aftermarket shares. Our task, therefore, is to determine
9
whether the third amended complaint sufficiently alleges such
participation.1
3.
a.
¶21 In Standard Chartered, the court of appeals defined
“participate” as “to take part in something (an enterprise or
activity) . . . in common with others,” or “to have a share or
part in something.” 190 Ariz. at 21, 945 P.2d at 332 (quoting
Webster’s Third New International Dictionary 1646 (1969)); see
also A.R.S. § 1-213 (2002) (“Words and phrases shall be
construed according to the common and approved use of the
language.”); State v. Wise, 137 Ariz. 468, 470 n.3, 671 P.2d
909, 911 n.3 (1983) (referring to an “established, widely
respected dictionary for the ordinary meaning” of a statutory
term). Applying that definition, Standard Chartered held that a
certified public accounting firm that had issued allegedly
1
In evaluating motions to dismiss, Arizona courts consider
only the “well-pled facts,” not legal conclusions. Cullen, 218
Ariz. at 419 ¶ 7, 189 P.3d at 346. Thus, it is not sufficient
that a pleading alleges “participation” if the facts alleged do
not support that theory.
Although the third amended complaint in this case alleges
that the defendants “made” the sale of the KPNQ stock, the Trust
has never advanced this argument, nor do the well-pled
allegations of the third amended complaint support such an
inference. It is uncontested that the Trust purchased the
aftermarket stock from sellers other than the defendants. The
Trust does not contend that the brokers who made the sales were
liable under § 44-2003(A), presumably in light of the exception
in the second sentence.
10
misleading audited financial statements and made them available
to a plaintiff who bought stock in the audited firm had not
“participated” in a sale. 190 Ariz. at 21, 945 P.2d at 332.
¶22 The Trust argues that because the defendants induced
its purchase of KPNQ stock, they must also have participated in
the sale. It is clear that one may simultaneously induce and
participate in an illegal sale. For example, when a seller
persuades a purchaser to buy securities through
misrepresentations, he has undoubtedly not only induced the
illegal sale, but also participated in it, and, indeed, made it.
See, e.g., Trump, 84 Ariz. at 321-23, 327 P.2d at 1003-04; Strom
v. Black, 22 Ariz. App. 102, 103-04, 523 P.2d 1339, 1340-41
(1974). But we reject the argument that the three phrases in
§ 44-2003(A) are necessarily coterminous. As Standard Chartered
correctly observed, participation and inducement are commonly
understood to involve separate factors. Compare 190 Ariz. at
21-22, 945 P.2d at 332-33 (defining inducement) with id. at 21,
945 P.2d at 332 (defining participation). Despite the
possibility of overlap, if all inducers were thereby also
automatically participants, use of the term “induces” in § 44-
2003(A) would be unnecessary. We ordinarily do not construe
statutes so as to render portions of them superfluous. Williams
v. Thude, 188 Ariz. 257, 259, 934 P.2d 1349, 1351 (1997).
11
¶23 The interpretation of § 44-2003(A) offered by the
Trust also conflicts with the second sentence of the statute,
which provides that a person does not “participate” in an
illegal purchase or sale “solely by reason of having acted in
the ordinary course of that person’s professional capacity in
connection with that sale.” Had the legislature also intended
to exempt such persons from inducement liability, it surely
would have said so. See Champlin v. Sargeant, 192 Ariz. 371,
374 ¶ 16, 965 P.2d 763, 766 (1998) (“[T]he expression of one or
more items in a class indicates the intent to exclude omitted
items of the same class.”).
¶24 Like the courts below, we conclude that the conduct
alleged in the third amended complaint does not describe
participation in the illegal sales. Rather, that pleading
alleges that, through their acts and omissions, the defendants
encouraged the Trust to buy stock from others in the
aftermarket. This is classic inducement. See Standard
Chartered, 190 Ariz. at 21-22, 945 P.2d at 332-33 (defining
inducement). The complaint alleges no relationship whatsoever
between the sellers of the KPNQ aftermarket shares and the
defendants. Nor does it allege that the defendants played any
role in the transactions between the Trust and the sellers after
persuading the Trust to purchase the stock. In contrast, in
Strom, a case relied upon by the Trust, the defendants not only
12
persuaded the plaintiffs to buy stock, but then also drafted the
sales agreement, received funds from the plaintiffs, and took a
commission from the sales. 22 Ariz. App. at 103-04, 523 P.2d at
1340-41.
¶25 The third amended complaint alleges that the
defendants referred the Trust to an unidentified broker. But
that pleading did not assert that the broker was involved in the
aftermarket sales or that the Trust ever communicated with the
broker. Nor did it allege that the broker was aware of the
fraudulent scheme to inflate Qwest’s earnings. The court of
appeals thus correctly concluded that these allegations do not
constitute participation under § 44-2003(A). Grand II, 222
Ariz. at 502 ¶ 12, 217 P.3d at 1207.
¶26 The Trust also claims that the defendants had a
financial interest in the aftermarket sales, which purportedly
buoyed the price of Qwest stock. The Trust thus argues that,
unlike the accounting firm in Standard Chartered, the defendants
had a “stake” in these sales. See 190 Ariz. at 21, 945 P.2d at
332 (noting absence of auditor’s stake in stock sales). But
even if the defendants benefitted substantially from the
aftermarket stock purchases, it does not necessarily follow that
they also participated in the sales. Indeed, others also
undoubtedly benefitted from the rising market, but that alone
13
would not establish that they participated in the aftermarket
sales to the Trust.
¶27 The Trust also argues that if there is no
participation liability here, innocent stock purchasers will
have no effective remedy under the ASA. To the contrary,
inducement liability under § 44-2003(A) covers the precise
situation alleged by the Trust. We therefore see no warrant to
stretch the definition of “participated in” beyond normal
understanding.
b.
¶28 The Trust also asserts that McMaster and Nacchio are
liable under A.R.S. § 44-1999(B) (2003) because they
“controlled” KPNQ. This statute imposes joint and several
liability on anyone who, “directly or indirectly, controls any
person liable for a violation of section 44-1991.”
¶29 The third amended complaint alleges that McMaster and
Nacchio controlled KPNQ. Section 44-1991(B), however, by its
terms imposes only secondary liability; a “control” person is
not liable under that statute unless the controlled entity is
itself also liable. Because KPNQ did not participate in any of
the allegedly illegal aftermarket stock purchases, control
person liability is not available against the two individual
defendants.
14
c.
¶30 The Trust also claims Nacchio, McMaster, and Qwest
aided and abetted KPNQ’s violations of § 44-1991(A)(3). In
Davis, we stated that such a claim has three prerequisites:
(1) a primary violation has occurred; (2) knowledge of
or a duty of inquiry with regard to the primary
violation by the person charged; and (3) a necessary
contribution to the underlying scheme by the person
charged.
123 Ariz. at 331, 599 P.2d at 784; see also Wojutnik v. Kealy,
394 F. Supp. 2d 1149, 1170 (D. Ariz. 2005) (recognizing aiding
and abetting liability under the ASA). After our opinion in
Davis, however, the legislature expressly left open whether
aiding and abetting liability exists under the ASA. 1996 Ariz.
Sess. Laws, ch. 197, § 11(B) (“Nothing in this act . . .
determines whether or in what circumstances aiding and abetting
liability exists under Title 44, chapter 12, Arizona Revised
Statutes.”).
¶31 The defendants urge us to hold that there is no cause
of action for aiding and abetting a violation of the ASA. Cf.
Central Bank v. First Interstate Bank, 511 U.S. 164 (1994)
(holding that no cause of action exists for aiding and abetting
violations of § 10(b) of the Securities Exchange Act of 1934).
We need not, however, confront this issue today. As Davis
recognizes, aiding and abetting liability is premised on the
finding of a “primary violation.” 123 Ariz. at 331, 599 P.2d at
15
784. The only basis for recovery offered by the third amended
complaint is that the defendants participated in the illegal
aftermarket sales. If no defendant participated in an unlawful
sale, there can be no aiding and abetting liability.
d.
¶32 Arizona Rule of Civil Procedure 15(a)(1) provides that
“[l]eave to amend shall be freely granted when justice
requires.” The Trust argues that, if we affirm the dismissal of
the third amended complaint, we should instruct the superior
court to allow the filing of a fourth amended complaint alleging
that the defendants induced the Trust’s aftermarket stock
purchases.
¶33 We decline to do so. The Trust expressly chose to
eschew an inducement theory in its third amended complaint. The
Trust then sought leave to amend the third amended complaint in
response to the defendants’ motions to dismiss. The trial
court, however, denied leave to amend because the Trust had not
submitted a proposed fourth amended complaint. See Ariz. R.
Civ. P. 15(a)(2) (requiring submission of proposed amended
complaint with motion to amend). The Trust did not challenge
this ruling in the court of appeals or in its petition for
review, instead raising the suggestion that further amendment
should be allowed for the first time in a passing statement in
the final paragraph of its supplemental brief. See State Farm
16
Mut. Auto. Ins. Co. v. Tarantino, 114 Ariz. 420, 422, 561 P.2d
744, 746 (1977) (treating issue raised before trial court but
not on appeal as abandoned); Ariz. R. Civ. App. P. 23(c)(1)
(requiring petition for review to set forth the “issues which
were decided by the Court of Appeals and that the petitioner
wishes to present to the Supreme Court for review”).
¶34 In any event, we cannot conclude that the superior
court abused its discretion in refusing to allow a fourth
amended complaint, given the long history of this case and the
Trust’s considered decision to abandon any inducement theory
after years of litigation. On the facts before us, the
interests of justice would not be served by beginning anew.
III.
¶35 For the reasons above, we affirm the judgment of the
superior court and the opinion of the court of appeals.
_____________________________________
Andrew D. Hurwitz, Vice Chief Justice
CONCURRING:
_____________________________________
Rebecca White Berch, Chief Justice
_____________________________________
Michael D. Ryan, Justice
17
_____________________________________
A. John Pelander, Justice
_____________________________________
Peter B. Swann, Judge∗
∗
Justice W. Scott Bales has recused himself from this case.
Pursuant to Article 6, Section 3 of the Arizona Constitution,
the Honorable Peter B. Swann, Judge of the Arizona Court of
Appeals, Division One, was designated to sit in this matter.
18